Stocks soar as sales and earnings slow.
You tell me – how long can that last?
S&P 500 companies continue to report third quarter earnings. And it looks as though sales and earnings are set to decline.
While sales have declined the past two quarters, we haven’t seen both sales and earnings decline since the third quarter of 2009!
Can’t have that! In today’s economy, slowdowns aren’t an option. If a problem arises, central banks just whack it with more stimulus!
So as signs of more stimulus emerge in China and Europe – sure enough, stocks continue to rally. Bad news continues to be good news for the market on crack.
I’ll ask again: how long can they keep it up?
Sales have declined for three quarters straights as the chart below shows. Thomson Reuters forecasts that in the third quarter, earnings per share will drop 2.8% while sales drop 4%.
This doesn’t end well, and people are beginning to see it.
“The industrial environment is in a recession. I don’t care what anyone says.”
That’s from Daniel Florness, the CFO of industrial distributor Fastenal Company. Meanwhile, businesses from Caterpillar to Johnson & Johnson keep lowering estimates.
Here’s that chart:
The worst results continue to come from the energy, manufacturing and basic materials sectors. The explanation has been that since China is slowing, commodities are suffering, which hurts emerging countries too. And the rising dollar and falling oil prices are hurting U.S. exporters.
So the energy sector is expected to see sales drop by a third and profits by nearly two-thirds, versus the third quarter last year.
That’s at oil near $50.
What if it hits my target of $10 to $20?
We also saw the jobs data come in weaker than expected in August and September.
The next graph tells the story better:
Private sector jobs have gone from highs of near one million on a three-month change in late 2014… to 0.4 million in September.
Said another way, from 320,000 jobs a month to just 135,000!
Some of the private sector decline has been masked in the broader jobs numbers. While the private sector has been cutting back, government jobs went up from near zero to 90,000. Government: always there to lend a helping hand.
Things are not okay. Central banks do not have the situation under control.
We’ve been warning about the overbuilding and collapse of China, falling commodity prices, and slowing emerging countries, for years. It’s finally getting serious.
Most analysts think the U.S. economy is OK outside of these dollar and global slowdown factors.
But here’s a few thing they don’t see coming… happening this next year…
They don’t see the slowdown of the affluent sector, wherein the top 20% control over 50% of income and spending. This group peaks at age 54 – that’s this year – and they hold almost all of the bubbled up financial assets like stocks. That’s where QE has had its impact – not on Homer Simpson.
Analysts also don’t see that car sales, which have been strong up to this point, will lead the downturn in 2016 as they also peak with that affluent sector at age 54.
Then there’s the continued slowdown in China – the world’s second largest economy. That country will begin a hard landing at some point in the next year. Its stock bubble has been the first to begin crashing – and it is crashing! No doubt about it. Its economy and real estate can’t be far behind.
Finally, there’s Mother Germany – Europe’s economic powerhouse – who has the worst demographic trends in the world through 2022. Like China, they’ll begin to slow much more in the next year. And the fact that it has to take care of one million-plus refugees doesn’t help!
I promise you – the slowing we are beginning to see, this third quarter especially, is just the beginning of a much larger trend. One that I believe will see its worst between early 2016 and 2017.
And it’s one thing for stocks to go up when earnings are just slowing. But when they’re declining? That’s another case, ladies!
For now, stocks can stay up on hopes of more stimulus. But there will be a point pretty soon when bad news can no longer be good news.
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